Michael Perelman writes: >> Second, Gene Coyle is absolutely correct that free markets cannot work with >> an >> airline-like cost structions.
Isn't there a joke about the economist who says the proposal may work in reality, but will never work in theory? The last time I looked there is a fully-functioning airline system in the United States. Are we supposed to ignore that reality and pretend it does not exist? Yes, it can be very difficult to make a buck running an airline for reasons identifed by Gene Coyle (especially with fuel costs escalating), but why do you then leap to the statement "free markets cannot work" for the industry? It seems like it is working perfectly -- a very competitive market that drives down prices for the benefit of the consumer. >> Finally, David might explain why workers sit so far down in the bankruptcy >> pecking >> order. Is their anybody else between workers & equity holders in the >> pecking order? This is factually incorrect. As we discussed awhile ago, workers are a favored bankruptcy constituency. Conceptually, amounts owed to workers are debts pari passu with all other unsecured debt (suppliers, landlords, bondholders, etc.). However, specific provisions benefit workers. The recent bankruptcy amendments increased the priority for wages and benefits to $10,000 per employee earned within 180 days of the bankruptcy. Notwithstanding Marvin Gandall's doubts, it is significantly more difficult in bankruptcy to modify collective bargaining and retirement agreements than to modify the rights of bondholders and other creditors. In most successful chapter 11's, employees are largely unaffected. The airlines cases are unique in that the employee agreements were critical factors in the financial problems. (If and when GM files, it will be a similar case.) I remain adamant that the problem was structural because expectations and agreements go back to the pre-1978 period. Whenever the rules change dramatically, economic failure will result, because investments and contracts were keyed to the old rules. >> p.s. Why do the incompetents who push their firms into ruin get plush deals >> to steer >> the corp. through reorganization? This is a central policy of chapter 11 -- management stays in control and is not replaced by a trustee unless there is evidence of fraud or gross mismanagement. In most other countries, management is immediately replaced. The theory in the US is that current management is most knowledgeable about the business and best situated to negotiate a successful reorganization. The policy has many critics. Write your Congressman. David Shemano
